bad bitcoin

Why not all cryptocurrencies are the same, and why you should care and (re)act

background

For a longer period which I would like to admit, I have gained experience in banking and retail payments infrastructure. Being very curious about all things digital, particularly in my profession, I have added distributed ledger technology, blockchain, tokens, cryptocurrencies, as well as central bank digital currencies to my subject areas of expertise.

So, now that all Tom, Dick, Harry, and, unfortunately, El Salvador, are all into cryptocurrency, and Gucci, Mastercard, and Visa are all able to spend these things in real life, I think it’s important to add serious food for thought to those who have, or are thinking, In the field of cryptocurrency.

Cryptocurrency basics

Before diving into what cryptocurrencies like Bitcoin, Ether (ETH) or Dogecoin (besides being money) are, one needs to understand some basics.

Blockchain

The basis of cryptocurrencies is the blockchain database. As the name suggests, data is stored in blocks with the blocks added together in an endless long chain of blocks, hence the term blockchain. Blockchain (ledger) is distributed On many standalone computers it is an example of a Distributed Ledger or DLT.

Ensuring the legitimacy of the block

For an individual block to be chained to or chained to the existing block chain, block validation is required to ensure that the transacting parties are who they say they are, that they have permission to transact, that transactions occur in order and that an asset double-spend does not occur.

In the blockchain, the validation method is called the consensus method, which means that all the computers in the blockchain, may have a role in validating the addition of a block (of data). The computer that validates the block receives a file Reward or reward about trouble. On the blockchain, this reward is called a cryptocurrency.

Types of block verification

Mostly, either of the two consensus forms is used:

Proof of Work (PoW):

Proof of Work was first introduced on the Bitcoin blockchain, and it describes an approach in which computers on the blockchain may compete to solve a complex mathematical puzzle through the use of ‘brute force’, that is, by contributing the computational power to validate transactions and create Hash the block, close it and add it to the blockchain. This is called mining.

The computer that solves the puzzle first receives the aforementioned block reward in the form of a blockchain cryptocurrency. The higher the perceived value of the reward, the greater the incentive to apply computational power. In the case of the Bitcoin blockchain, this is encouraged by the reward being 6.25 Bitcoins (at the time of writing) or appr equivalent. $200,000 USD!

Proof of Stake (PoS):

Instead of all computers spending computational power at the same time solving puzzle and “hash” blocks, each computer might enter into a lottery of some sort where the computer is chosen at random. The higher the number of lottery tickets, the higher the chances of being selected and receiving a bonus. In other words, the higher the level bets, the bonus chance increases, hence the name Proof of Stake. Lottery tickets are cryptocurrency. Since it is random to choose which computer to solve the puzzle, it requires much less total computational power than PoW.

Why is Bitcoin bad?

Bitcoin and ETH (Ether) make up the vast majority of cryptocurrency transactions. A large number of other 10,000 cryptocurrencies are built on the Ethereum blockchain.

Both Bitcoin and Ethereum blockchains are based on Proof of Work (PoW) where increased traffic and interest in the cryptocurrency directly translates into applied computational power and therefore higher energy usage. And in the case of Bitcoin and the Ethereum platform, this is a file huge Lots of energy! Some bitcoin miners focus only on this reward, and have built huge “mining” farms, mainly made up of thousands of powerful computers competing to solve the puzzle and get the bitcoin reward. Mining operations are such a drain on the electrical grid that some mining operations have gone so far as to revitalize idle coal power plants!

At the time of writing, Bitcoin blockchain traffic and usage for just one year accounted for 205 TWh of global energy consumption of 166,000 TWh with 70% of this being coal, gas or nuclear. Over the course of a year, Bitcoins (at the time of writing):

  • 1 out of every 800 lights is lit
  • 17 times the energy of Google and all of its operations (12 TWh per year)
  • 41 times Facebook’s energy (5 TWh per year)
  • Equivalent to annual energy use in Thailand

How to reduce energy on cryptocurrencies?

There are other ways to validate Pow and PoS such as Proof of Stake Delegation (dPoS), Proof of Authority (PoA), Proof of Burn (PoB), Proof of Developer (PoD) and more.

They all reward the chosen computer that is validated with a cryptocurrency tied to this blockchain. Each method has its own advantages and disadvantages, but none relies on computational power (and thus, energy use) as proof of work!
Ethereum plans to fully transition to the PoS consensus at the end of 2022, which is supposed to be 99.95% more energy efficient than the current Ethereum PoW.

In terms of Bitcoin (which makes up 2/3 of Proof of Work-based traffic (2022), the genie is unfortunately out of the bottle. Nobody controls Bitcoin, so it is not possible to replace the embedded PoW.

Significantly [global] On a large scale, it may be possible to influence the Bitcoin blockchain or other PoW-based cryptocurrencies.

A 51% attack, exploiting the Proof of Work consensus model, might also work on a Proof of Work-based blockchain.

A global agreement with 100% of countries and territories agreeing to make PoW (cryptocurrency mining) illegal is also an option. However, this seems very unlikely.

A final choice would be whether the world’s major card schemes would make it more difficult, rather than easier, to exchange PoW cryptocurrencies with real-world money. However, it appears that they are increasingly focusing on getting “part of the action” and partnering with exchanges and issuers, in an effort to leverage their global networks to facilitate the real-world use of Bitcoin and other cryptocurrencies that require proof-of-work power.

Both Visa and Mastercard are using Bitcoin as a driver for their entry into the cryptocurrency space. However, this puts the MasterCard crypto program in clear conflict with sustainable growth as stated in the Mastercard “Statement of Purpose” and the Visa crypto program is in conflict with Visa’s “Values” in “Protecting the Planet.”

Conclusion

Blockchain is a very good and exciting technology that has the potential to radically change our world. Provided regulation (and thoughtful and sustainable implementation), blockchain and even cryptocurrencies have a role to play in relation to digital exchange and asset and securities management. But the proliferation, blind use and application of a Proof of Work-based blockchain does not bode well for the world.

One of my fellow expert experts on CBDCs also privately published an article on [lack of] The sustainability behind crypto assets. Read his blog here [in Norwegian].

I also invite you to read my other blog about why cryptocurrency is not money.

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